I have now had a chance to read the 23-page, very well-written, clear and concise DC Circuit court opinion on the Reg A+ challenge brought by two states (see entry below). The ruling started with a brief history of securities law, how it started with the states but moved to add federal oversight after the 1929 market crash. Offerings exempt from full SEC registration for smaller companies have been around for a long time, and Reg A actually was first adopted in 1936. In 1996, Congress preempted state oversight of offerings involving “covered securities,” at first essentially those to trade on national exchanges such as Nasdaq or the NYSE. The JOBS Act in 2012 expanded covered securities to include those issued in Reg A+ offerings to “qualified purchasers,” a term the Act said was to be defined by the SEC. The SEC said everyone is qualified because of additional investor protections in the new rules.
To succeed in their challenge, the states would have had to prove 1) that the Act “unambiguously foreclosed” the opportunity for the SEC to write the rules the way they did or 2) that the rules were “arbitrary and capricious” and serving no valid economic purpose. The states actually tried to argue that the JOBS Act was not clear in preempting state review of Reg A+ offerings. The Court clearly and strongly disagreed and made clear it was Congress, not the SEC, preempting the states. They also stated firmly that the SEC was given very broad power in the Act to write the definition of qualified purchaser almost entirely as they wished, regardless of prior proposals on other matters and even regardless of the plain meaning of the words. And it also noted that they added further protections such as the limit on investments by non-accredited investors and the enhanced disclosure and reporting obligations, as well as clearly demonstrating the economic benefits of the new rules (um it’s called the JOBS Act!). So, said the Court, they were not foreclosed by the law to act as they did and they did not act in an arbitrary or capricious fashion.
There is a broader legal discussion about the breadth of powers of administrative agencies to implement statutory edicts, but that is for another day and probably a legal journal in any event. Let us hope that the states that brought this and their supporters accept the ruling, take their licks and move on. One assumes they would not want to appeal just to be even further rebuked by a full appeals panel. So….let’s do some deals!